Have we now found a bottom for stocks? In Part 2 we recommended the "wait-and-see" approach, as more economic data is needed to show the impact of the subprime meltdown. I'm not going to pretend that it's easy to call a top or a bottom, but I believe that there is good value out there.
Photo:van_mij, Creative Commons, Flickr
But should you be buying? No one can deny that things have gotten better over the last week, but it's worth remembering that bottoms are processes that tend to take time. Jeffrey Saut at Raymond James points out that "in both the 1990 and 1998 selling stampedes, the markets peaked in July, but bottomed after a number of downside tests, and retests, in the September/October time frame." Mr. Saut believes that the bottoming process can be completed if there is stability in the housing, commercial paper and equity markets over the next 60-90 days.
I'm sorry to be such a party-pooper, but it's hard to see how a mess that took years to develop can be fixed in 60-90 days. We might have no idea when stock markets will bottom, but we can be sure that banks will be more reluctant to extend loans to smaller firms. More massive downgrades are inevitable as credit rating agencies desperately seek to salvage their institutional credibility. Tighter lending is bad news for the solar industry, an industry that has been burning through cash to expand capacity.
Let's compile another list to sift through the haze. Following is a list of solar stocks ranked according to their cash positions. We have ranked solar companies according to the ratio of levered free cash flow to market cap. Levered cash flow is what's left of free cash flow after the business pays the interest on debt and any dividends to preferred shareholders.
WFR: +3.20% of $13.13B market cap
SPWR: -0.03% of $5.21B market cap
FSLR: -2.50% of $7.00B market cap
ESLR: -11.33% of $884.99M market cap
ENER: -15.15% of $1.17B market cap
DSTI: -20.34% of $17.14M market cap
No levered free cash flow data is currently available for the Chinese solar companies (TSL, CSIQ, STP and SOLF). For context, this list should be compared to the list we discussed in Part 1. It is no coincidence that WFR shares climbed while all the other solar stocks tanked during the recent market turmoil.
In times of tighter lending and credit market turbulence it makes sense to place your money with a company that isn't over-reliant on bank lending for expansion. In that case it makes sense to go for the likes of MEMC Electronics (WFR – Last trade $58.32), Sunpower (SPWR – Last trade $62.51) and FirstSolar (FSLR – Last trade $95.83).
Disclaimer: I do not own any of the stocks mentioned above. I do not own a solar panel. We used levered free cashflow and market cap data listed on Yahoo's site.